A litigant’s obligation to preserve and collect relevant information at an early stage in the litigation was strengthened recently by the judge who authored the opinions in Zubulake v. UBS Warburg, 217 F.R.D. 309 (S.D.N.Y. 2003). In Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, No. 05 Civ. 9016 (S.D.N.Y. originally filed January 11, 2010, and amended January 15, 2010), Judge Shira Scheindlin held that after her July 2004 Zubulake decision, a party who fails to issue a written litigation hold when litigation is first anticipated will be deemed grossly negligent in their discovery practice, with potentially severe consequences. The court held that gross negligence may also be found where records are not promptly collected from key players and where e-mail or backup tapes which are the sole source of documents for key players are destroyed. While each spoliation case will turn on its own facts, issuing a legal hold and initiating collection efforts very early now seems to be the undisputed standard, for plaintiffs as well as defendants.
In November 2003, Plaintiffs, a group of sophisticated investors, retained counsel to recover $550 million in losses from the liquidation of two hedge funds in which they held shares. Plaintiffs filed suit in February 2004, asserting claims under federal securities and New York laws against former directors, administrators, auditors, and the prime broker and custodian of the hedge funds.
During the discovery process, one of the Defendants claimed that there were substantial gaps in Plaintiffs’ document productions. Defendant Citco moved for sanctions, seeking dismissal of the complaint or any lesser sanction the court deemed appropriate.
Shortly after being retained in 2003, Plaintiffs’ counsel had called and e-mailed Plaintiffs with instructions to collect documents it needed to draft the complaint and prosecute the case. While counsel distributed memoranda instructing Plaintiffs to be over-inclusive in its document collection, including e-mails and electronic documents, it did not instruct the clients to preserve all relevant documents and information or give the clients specific instructions or methods for collecting the documents.
The court found that the instructions given by Plaintiffs’ counsel did not meet the standard for a litigation hold. Plaintiffs, in fact, did not issue a written litigation hold until 2007, after the PSLRA stay had been lifted. The court held that Plaintiffs had a duty to preserve their documents as of 2003 and had failed to take adequate steps to do so.
According to the court, Citco then had the burden to demonstrate that relevant documents were destroyed after this duty to preserve arose. The standard of proof as to whether those documents were relevant and whether Citco suffered prejudice hinged on whether Plaintiffs were grossly or simply negligent. If Plaintiffs were simply negligent, Citco had to prove the relevance of the missing documents, whereas if Plaintiffs were grossly negligent, the relevance of the missing documents and resulting prejudice to Citco was presumed (subject to rebuttal evidence).
The court determined that all Plaintiffs, in failing to institute a timely written litigation hold, had acted in either a negligent or grossly negligent manner. Generally, the parties who were found to have acted in a grossly negligent manner had: (1) failed to collect or preserve any electronic documents prior to 2007; (2) continued to delete electronic documents after the duty to preserve arose; (3) failed to request documents from key players; (4) delegated search efforts without any supervision from management; (5) destroyed backup data; or, (6) submitted misleading or inaccurate declarations
The court found some parties acted in only a negligent manner, even though they had not issued legal holds, holding that in early 2004, the duty to issue a hold in Florida was less firmly established, thus more leniency was required. Examples of Plaintiffs’ negligent conduct included: (1) failure to clearly instruct employees with possible involvement with the hedge funds to preserve and collect all records related to the funds; (2) searches conducted without any supervision from management; and, (3) failure to search a Palm Pilot belonging to the president of the company.
The court awarded the sanction of a jury charge against the parties who were found to have acted in a grossly negligent manner. Some of the parties who had engaged in less egregious acts were ordered to conduct additional discovery. All Plaintiffs were required to pay monetary sanctions.
This opinion cements the well-known concept that a clear, detailed document preservation notice should be issued and preservation initiatives implemented as soon as a party — whether plaintiff or defendant — is on notice of potential litigation. In addition, parties must initiate document collection efforts, at least for key players, early in the litigation with close supervision by management or outside counsel. Failure to do so may result in a finding of gross negligence, so that any missing information may be deemed relevant, and prejudice to the opposing party may be presumed. As Judge Scheindlin held, “[w]hile litigants are not required to execute document productions with absolute precision, at a minimum they must act diligently and search thoroughly at the time they reasonably anticipate litigation.”